Hedge Funds Clash With Wall Street Bankers in ArgentinaKatia Porzecanski
The surge in Argentina’s securities tied to economic growth is rekindling a decade-old disagreement between investors and Wall Street.
The warrants, which provide payouts when growth exceeds targets, have jumped 29 percent from a nine-month low in March on speculation a data revision that boosted the size of the economy will lead to bigger payments in the future.
While investors are piling into the securities, banks from Citigroup Inc. to Credit Suisse Group AG say the advance is excessive as the terms of the warrants have enough wiggle room for Argentina to avoid making the larger disbursements. Issued in debt restructurings from Argentina’s $95 billion default in 2001, the warrants plunged in March when the government said changes in the way it calculates growth meant the economy didn’t expand enough to pay holders this year.
“There’s been this extreme valuation schizophrenia among analysts,” Shahriar Shahida, co-founder of New York-based hedge fund Constellation Management LLC, which owns the warrants, said by telephone. “We have found the Argentine valuation story to be one of the most compelling out there, and the warrants are the best way to play that.”
Bankers and analysts have been at odds with investors over how to value the warrants since they were first issued in 2005 as a sweetener to boost creditor participation, dismissing them initially before average economic growth of 6.7 percent over the years prompted a reassessment. They’ve produced an average annual return of 43 percent since 2006.
Jesica Rey, a spokeswoman for the economy ministry, declined to comment on how the revision will affect coupons.
As part of an effort to boost the credibility of its economic data after being censured by the International Monetary Fund last year, Argentina in March changed the base year for GDP to 2004 from 1993, reducing growth in 2013 to 3 percent, almost half the previously forecast pace and below the trigger for a warrant payment this year.
Officials released the new series of growth statistics May 9, which showed that when adjusted for inflation the economy is now about 20 percent bigger, according to Credit Suisse.
Holders of the warrants receive a payment if growth in the previous year exceeded a threshold and the inflation-adjusted value of the country’s GDP is above the base-case scenario laid out in the prospectus. The size of the coupon depends on the extent to which GDP exceeds the base case.
While future coupon payments could be about 20 percent higher, “this calculation is confused given the uncertainty over how the prospectus will be interpreted,” Jeff Williams, a strategist at Citigroup, said in a May 13 report.
The warrants were little changed at 8.1 cents at 3:07 p.m. in New York, according to data compiled by Bloomberg.
“We would not expect the government to set itself or future administrations up to pay out larger coupons if it can plausibly justify using a different adjustment factor,” Daniel Chodos, a strategist at Credit Suisse, said in a May 20 report.
Even if the government agrees to make bigger payments, investors won’t see a coupon before 2017 as growth stalls, according to Siobhan Morden, the head of Latin America fixed-income strategy at Jefferies Group LLC. The economy, which contracted in March for the first time since September 2012, will grow 0.2 percent this year, according to the average estimate of 24 economists surveyed by Bloomberg.
Since 2005, investors have received six payments totaling 18 cents as the Argentine economy boomed. The warrants can pay a maximum of 48 cents until they mature in 2035, or a total of $480,000 for a notional amount of $1 million.
“No one truly knows how to value them, and as a result, most of the major players in sovereign debt shy away,” Eric Kraus, a Moscow-based managing director at Nikitsky Capital, which oversees accounts that hold warrants, said by e-mail. “They have become, almost by default, the ultimate personal account asset. Over their lifetime they should be worth circa 35 cents. Not bad if you can afford to wait.”